Brett McDonnell's "Professor Bainbridge and the Arrowian Moment"

05/05/2009

Brett McDonnell's "Professor Bainbridge and the Arrowian Moment"

The latest issue of the Delaware Journal of Corporate Law carries an article by Brett McDonnell, Professor Bainbridge and the Arrowian Moment, which is a review of my book, The New Corporate Governance in Theory and Practice . (HT: Pileggi)

While I'm not persuaded by the core of Brett's critique, I think it's a very fair and balanced review that does make a number of valid points. As such, it is an important addition to the burgeoning literature on director primacy.

Here's the abstract:

The New Corporate Governance in Theory and Practice , a new book by Stephen Bainbridge, pulls together the leading arguments for director primacy that Bainbridge has made in a series of articles. In his core argument, Bainbridge uses theoretical work by Kenneth Arrow to explain the attractions of the separation of ownership and control with a centralized hierarchy headed by a board of directors. Bainbridge posits that achieving an optimal tradeoff between authority and accountability is the central problem of corporate law. He uses a key passage from Arrow to argue that in making this tradeoff, lawmakers should always make a presumption in favoring of preserving managerial authority. This paper examines Bainbridge's argument, and shows that he does not succeed in justifying this presumption. Arrow's argument does persuasively show why rules that lead to constant review of all board decisions would effectively eliminate board authority, and that this would be unattractive. However, none of the major pro-accountability reform proposals currently in play comes even close to eliminating board authority. Arrow's argument is not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from a total, loss in authority is a good idea or not. That is, Bainbridge's use of Arrow does not help us determine the wisdom of current reform proposals. Bainbridge's attempt to use Arrow thus falls far short of his target. Bainbridge has other, less original, arguments which supplement his core argument for board authority. This paper considers the leading supplementary arguments as well, and also finds them wanting. The paper ultimately moves beyond a critique of Bainbridge to argue more affirmatively for greater accountability for boards.

Posted at 10:54 AM in Books | Permalink

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Here's the abstract:

The New Corporate Governance in Theory and Practice , a new book by Stephen Bainbridge, pulls together the leading arguments for director primacy that Bainbridge has made in a series of articles. In his core argument, Bainbridge uses theoretical work by Kenneth Arrow to explain the attractions of the separation of ownership and control with a centralized hierarchy headed by a board of directors. Bainbridge posits that achieving an optimal tradeoff between authority and accountability is the central problem of corporate law. He uses a key passage from Arrow to argue that in making this tradeoff, lawmakers should always make a presumption in favoring of preserving managerial authority. This paper examines Bainbridge's argument, and shows that he does not succeed in justifying this presumption. Arrow's argument does persuasively show why rules that lead to constant review of all board decisions would effectively eliminate board authority, and that this would be unattractive. However, none of the major pro-accountability reform proposals currently in play comes even close to eliminating board authority. Arrow's argument is not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from a total, loss in authority is a good idea or not. That is, Bainbridge's use of Arrow does not help us determine the wisdom of current reform proposals. Bainbridge's attempt to use Arrow thus falls far short of his target. Bainbridge has other, less original, arguments which supplement his core argument for board authority. This paper considers the leading supplementary arguments as well, and also finds them wanting. The paper ultimately moves beyond a critique of Bainbridge to argue more affirmatively for greater accountability for boards.